Cars coming off lease head for bargain bin on used-car lots

A glut of used cars is creating great buys for consumers and good times for dealers, but some headaches for those in the auto leasing business, according to industry sources.

"This is a terrific time to buy a used car," said Paul Taylor, chief economist with the National Automobile Dealers Association. He said an abundance of vehicles on the market has resulted in big bargains on used-car lots.

Raymond C. Nichols, president of the National Auto Auction Association, agreed. "There has never been a better year to buy a used vehicle than now," said Nichols, whose group represents 365 auto auctions in the U.S. and 18 other countries.

He pointed out that some 3-year-old Ford Explorers are going for around $15,500--about $2,500 less than what a 3-year-old Explorer cost in 2000.

"When we think of new-car dealers, the flashy showroom comes to mind," said George E. Hoffer, an economics professor at Virginia Commonwealth University in Richmond and an auto analyst. "But the difference between a successful new-car dealership and a nonsuccessful one can be the way they run their used-car lot."

He said used cars accounted for 29 percent of the average new-car dealership's sales last year and were considerably more profitable for dealers than new cars were.

Taylor said the average dealer profit last year was $186 on a new car and $244 on a used car.

Nichols said the good times for used-car buyers probably will last 12 to 18 months more. He thinks it will take that long for a big supply of cars in the leasing fleets to work through the market.

The industry expects about 4 million 3- and 4-year-old vehicles to come off lease this year, double the number that came off lease last year.

"Leasing was big in the late 1990s," Nichols said. "They kept going up, up and up and accounted for about a third of sales in 1999."

Sagging used-car prices, which cut into the residual value of cars at the end of leases, have reduced the popularity of leasing.

Under a typical lease, monthly payments are based on the estimated value of the vehicle at the end of the lease. With the value of used cars declining, leasing companies are increasingly unable to sell cars and recover their investments.

So, Taylor said, leasing companies have raised the monthly cost to customers leasing cars by an average of $80 to $125 in recent years.

Hoffer said that companies lost an average of about $2,400 on every vehicle coming off lease last year. So, manufacturers have been cutting back on the number of auto leases they write. This year, leases are expected to account for about 25 percent of sales.

Hoffer said the declining value of used cars at the end of leases resulted in big losses for banks, too, in recent years.